On Nov 27, 2013, we downgraded our recommendation on Aetna Inc. (AET) to Neutral from Outperform; following its third quarter earnings miss, with a 1.96% negative earnings surprise. The health insurer presently carries a Zacks Rank #3 (Hold).
Why downgrade?
On Oct 29, 2013, Aetna reported third-quarter 2013 earnings of $1.50 per share, down 3 cents per share from the Zacks Consensus Estimate. Earnings were also down 3.2% year over year.
Aetna has also witnessed a decline in earnings estimate since the earnings release. The Zacks Consensus Estimate for 2013 went down by 0.3% to $5.87 per share as 5 out of the 17 analysts pulled down their estimates over the last 30 days. The same for 2014 went down by 2.4% as 11 out of the 18 analysts took a similar stance.
During the third quarter conference call management sounded cautious about its 2014 earnings outlook as it announced that the worst-case scenario for 2014 is that per-share earnings from operations will remain flat, compared with 2013 earnings.
Some of the headwinds facing Aetna in 2014 are Medicare Advantage reimbursement cuts and the industry premium tax.
The company is also expecting margin pressure in experience-rated group commercial and an uptick in the cost trend.
The low interest rate environment is expected to continue into 2014, which would negatively impact Aetna's investment income
Nevertheless, tailwinds such as incremental Coventry accretion, fixed cost leverage and cost management; expanding international business, expansion of its Accountable Care Organization strategy and share repurchases will aid earnings.
Other stocks to Consider
Other better ranked stocks Assurant Inc. (AIZ), CIGNA Corp. (CI) and Centene Corp. (CNC), all with Zacks Rank #2 (Buy) are worth considering.
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